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Pennsylvania Audits Recover $1.3M in NatGas Royalties

After more than a year of conducting volumetric and price audits, the Pennsylvania Department of Conservation and Natural Resources (DCNR) has recovered more than $1 million in natural gas royalty payments from land it has leased in state forests.

Between 2015 and this year, the department said it recovered $1.3 million in royalties. Early last year, the agency confirmed that it had stepped-up its auditing process by hiring another accountant in its Bureau of Forestry and two outside consultants (see Shale DailyJan. 9, 2015). It has declined to name the companies that were investigated.

With the sharp spike in Marcellus Shale activity on state-owned land in recent years, DCNR realized that companies could be deducting post-production costs related to transport and processing, which the state's leases prohibit. The agency was able to recover the royalties because of its leases, which require operators pay 35 cents/Mcf or a 20% royalty if it is higher.

DCNR's Bureau of Forestry manages 2.2 million acres of state forest system, representing about 13% of the state's forested land. About 1.5 million acres of the state-owned forest system lies within the prospective limits of the Marcellus Shale. Development and gas storage leases issued by DCNR in state forests total 343,915 acres. Since 2008, DCNR has issued three shale gas-specific leases totaling 138,866 acres. The last time a shale lease was sold was in 2010.

Shale gas development began on state forest lands in 2009. DCNR has approved 236 well pads and 1,026 shale wells since 2008, which have brought in about about $862 million in bonus and royalty payments. Last year, Gov. Tom Wolf banned oil and gas leases in state-owned parks and forests, which DCNR recently supported with a position statement on oil and gas development released with its State Forest Resource Management Plan (see Shale DailySept. 9aJan. 29, 2015).

The agency has not said whether it could recover more royalties through the audits. The issue of post-production costs and royalties in the state has continued to escalate in recent years, culminating last December with the state attorney general filing a wide-ranging lawsuit against Chesapeake Energy Corp. over alleged royalty deductions (see Shale DailyDec. 9, 2015). Other companies have battled landowners in private cases across Pennsylvania.

Local governments in Bradford County, one of the state's most heavily drilled areas, have passed resolutions to limit gas production and urge lawmakers to act on a bill that would clarify the state's Guaranteed Minimum Royalty Act of 1979 to address post-production costs (see Shale DailySept. 9b).

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